With the S&P 500 index officially entering a bear market after dropping 20% year to date, it is more prudent than ever to make sure your holdings allow you to sleep at night.
By looking at dividend-growing stocks with steady operations, investors can add serious stability (and passive income) to their portfolios, allowing them to avoid making rash investment decisions.
A “staple” with a 5% yield
Bradley Guichard (Verizon Communications): The economy has officially entered a bear market in each major index. Panic time, right? Maybe not. Markets have to come down sometimes; that’s how it works. Yes, it’s unpleasant, but it does have its opportunities. Investors can take advantage of dollar-cost averaging (incremental buying over time to mitigate risk) and focus on portfolio quality and balance.
Inflation causes consumers to make tough choices when tightening spending habits. Traditionally, consumer staples like food and household goods perform the best. Walmart is an excellent example of the ultimate low-cost consumer staples retailer. But what about a more modern staple? I bet many people would give up their car before their wireless plan. Our devices have become a necessity that few can do without.
Verizon is a leader in the field, offering wireless and broadband services to businesses, governments, and consumers, along with device sales. Verizon is a leader in the 5G networking push and an essential player in the industry. The company has struggled with growth in recent years but makes up for it in profitability and dividend yield.
The company has posted total sales in the range of $128 billion to $134 billion in each of the past three years, with operating margins ranging from 22% to 24%. This has allowed the company to generate plenty of cash flow to maintain the dividend. The recent stock price dip has pushed the dividend yield well over 5%, as shown below.
The stock price loss can be investors’ gain as they can snag nearly the highest yield provided by Verizon over the past years. This could be a terrific opportunity to lock in. There is no telling where the market is going in the short term, and Verizon’s share price may dip further, but investors can rest easy knowing they are collecting an excellent yield on a great company.
Short-term issues shouldn’t distract from long-term strengths
Jeff Santoro (Target): Target has been in the news lately for all the wrong reasons. When the company reported first-quarter 2022 earnings in May, one of the headlines was that the company had miscalculated its inventory, resulting in an excess of bulky items such as kitchen appliances, outdoor furniture, and TVs. In the weeks since that report, shares are down almost 14%.
The inventory issues are worth keeping an eye on as they will likely impact the financial results. However, looking beyond this short-term concern, there’s still a lot to like about Target’s business and future prospects.
Most of the first-quarter 2022 results look weak in comparison to recent quarters, but it’s worth remembering that the year-over-year numbers are deceiving because Q1 2021 was a very strong quarter, so the comparison is tough for Target. Comparable-store sales growth grew 3.3%, on top of 23% growth last year. In addition, Q1 2022 marked the 20th consecutive quarter of sales growth, showing the steady and consistent results shareholders have come to expect.
One interesting trend is the growth in same-day services, which increased 8% in the quarter. These include orders that are placed online and picked up in the store, or brought out via curbside pickup, as well as those delivered via Shipt, the same-day delivery service acquired by Target in 2017. Of these same-day services, drive-up was the strongest, posting growth in the mid-teens, on top of 120% growth last year. This shows that Target’s investments in omnichannel services are paying off.
Target has also been very friendly to shareholders over the past few years. In Q1, Target repurchased $10 million of its shares and over the past five years the company has reduced its shares outstanding by more than 15%. It has also increased its dividend by 74% over the same time frame. The dividend yield is currently 2.58%, handily outpacing the S&P 500’s yield of 1.37%.
No one knows how long this bear market will last, but Target provides an omnichannel shopping experience that consumers rely on for household items they’ll need regardless of the economic environment. Steady long-term results and an above-average dividend yield make Target a great choice to help weather the current market storm.
A quiet pet and livestock gem
Josh Kohn-Lindquist (Tractor Supply Company): A popular investing theory suggests that regardless of the market conditions, chocolate, alcohol, and pet care spending tend to persist. So while Tractor Supply sells its fair share of chocolate in its stores, the pet care spending opportunity makes the rural lifestyle retailer attractive.
Accounting for nearly 50% of its total sales in 2021, the livestock and pet category for Tractor Supply generated around $6 billion in revenue and is the backbone of the company’s operations. Best yet for investors, this category fits beautifully into the company’s “CUE” (consumable, usable, and edible) focus — providing consistent and recurring purchases for its customers’ beloved pets and valuable livestock.
Thanks partly to these repeat sales, Tractor Supply has been one of the most successful stock picks over the last few decades, rising over 300% in just the last 10 years alone.
Posting year-over-year sales and earnings per share (EPS) growth of 8% and 7%, respectively, for the first quarter of 2022, Tractor Supply continued its steady expansion plans. But, perhaps most importantly to investors, the company recorded its 39th consecutive quarter of double-digit or higher e-commerce sales growth — highlighting that its omnichannel sales strategy continues to fire on all cylinders.
Leading this incredible digital sales growth, Tractor Supply now boasts over 2 million downloads of its mobile app and grew its Neighbor’s Club membership base by 24% to nearly 25 million members as of Q1 2022.
While these growth metrics and the company’s expansion on its top line over the last few years are impressive enough, Tractor Supply’s rapidly improving profitability is truly eye-catching.
Thanks to improving profit margins and consistent share buybacks, the company has seen net income and EPS growth easily outpace its increase in sales.
But these significant share repurchases are only a part of Tractor Supply’s incredible track record of returning cash to shareholders, as it also currently pays a 1.5% dividend. Despite having increased its dividend for 11 consecutive years, the company’s payout ratio is still only 28% — meaning management could triple its dividend and fund these payments entirely from its net income.
Due to this massive dividend potential, a gradually declining share count, steadily improving margins, and a core livestock and pet category that will continue to thrive regardless of any market condition, Tractor Supply looks like a phenomenal business to consider at 22 times earnings.